A recent Delaware Supreme Court decision, RAA Management LLC vs. Savage Sport Holdings, Inc., underscores the enforceability and scope of non-reliance clauses in confidentiality agreements.
In that case, Delaware’s Supreme Court held that a confidentiality agreement’s non-reliance provisions barred fraud claims against the disclosing party for its allegedly fraudulent disclosures.
Savage was the potential seller, RAA, the potential buyer. The two parties entered into a confidentiality agreement with these typical provisions:
- Savage made no representations and warranties regarding whether the information it delivered to RAA was accurate or complete.
- RAA’s reliance on that information was without liability to Savage.
- RAA waived any claims it may have in connection with any potential transaction with Savage.
- The parties’ claims and liabilities, if any, would arise only under a signed, definitive purchase agreement between them.
After some initial due diligence, RAA and Savage signed a letter of intent. RAA then spent $1.2 million on due diligence before abandoning the deal. RAA believed Savage had been less than forthcoming during diligence, so it decided to sue Savage to try to recover its diligence costs. RAA pled fraud, claiming that Savage had concealed and misrepresented material liabilities.
Delaware’s Superior Court ruled in favor of Savage. Delaware’s Supreme Court affirmed that ruling, finding that the result would be the same under both New York and Delaware law.
The lessons here are these:
- Under Delaware law, be careful what you ask for in a contract and how you ask for it. Chances are you will get it.
- Sophisticated parties to a contract with unqualified, non-reliance provisions cannot assert fraud for matters outside the contract’s four corners. This is what the Delaware Court of Chancery taught in ABRY Partners V, L.P. v. F & W Acquisitions LLC, 891 A.2d 1032. It’s also what an Illinois court taught in Tirapelli v. Advanced Equities, Inc., 813 N.E.2d 1138.
- The buyer, RAA, could have protected itself in one of three ways:
- Require that the non-reliance provisions be omitted;
- Have the seller represent and warrant that its disclosures were accurate and complete; or
- Have an exception to the non-reliance provisions that would hold the seller liable for fraudulently or intentionally inaccurate information.
- Would a sophisticated seller agree to the first two suggested forms of buyer protection? Likely not, but a good-faith seller should be willing to agree to some form of the above-described exception. If not, then buyer beware.